You need a macro view of the world to answer one question, how’s the water?
In his famous commencement speech, David Foster Wallace begins with a fable, “There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?”
For the first time in decades, our water is changing. In our economy, the Fed sets the temperature of the water and for the first time in decades, it’s getting colder. The era of cheap money is officially over as rate hikes have us paying 2x our DoD budget on the free debt we got just one year ago.
To give an idea of how explosive our predicament is, Japan raised rates 0.2% and their financial market crashed. Japan’s debt is 200% their income while ours is over 120%. With so much more of our income going to pay off debt, we have less to invest in developing a tax base capable of paying it off.
Higher rates also make homes more expensive through higher mortgages. With a supply constricted due to Hedge funds buying up real estate, obtaining the number one indicator of future wealth is more costly. Subsidies will not solve housing affordability, it’ll add to it.
Cooling waters means less of it. For the first time in decades, the amount of money is our economy is shrinking. Our money supply, M2, is declining as the Fed reverses Budget Sheet policy, selling off assets and stashing the cash.
My brand of economics forecasts a reflection of the change in money in prices. Unless offset by more growth, falling prices may cause a recession.
The probability of a recession misses the larger threat of a currency debasement when our government realizes the only way to pay off 35 trillion is to print 35 trillion.
We cannot default on our debt. That leaves three options:
Grow our way out of it
Keep kicking the can
Print more money
…are you starting the see the appeal of a money the government can’t control?
A legitimate answer lies at the heart of the problem, us. Political expediency has been shown to be the catalyst of the secular trend of debt since the 1970s. Because we look at each other as the enemy, we look like a country that just got back from war, not one coming out of peace time now walking into not two but potentially 3 wars.
For all the macro tides that need years to change, our attitude can be switched on a dime. We just need is a spark. Human ingenuity has solved and will solve any problem we face. The hard part is getting along.